TEXT - S&P affirms The Netherlands 'AAA' long-term rating

Mon Jan 14, 2013 12:28pm EST

Overview
     -- We are affirming the 'AAA' long-term and 'A-1+' short-term unsolicited 
sovereign credit ratings on The Netherlands.
     -- The outlook on the long-term rating is negative. 

Rating Action
On Jan. 14, 2013, Standard & Poor's Ratings Services affirmed its 'AAA' 
long-term and 'A-1+' short-term unsolicited sovereign credit ratings on the 
State of The Netherlands. The outlook on the long-term rating remains 
negative. 

Rationale
The ratings reflect our view of The Netherlands' prosperous, diversified, and 
competitive economy, visible in its strong net external position and high per 
capita GDP. The ratings also reflect our view of its long track record of 
prudent and flexible macroeconomic policy.

We consider the Dutch economy to be highly competitive and productive, with 
GDP per capita of $47,000 (EUR36,900) in 2012, and, despite rising layoffs since
2011, one of the lowest unemployment levels in the EU, at 5.6%. The Dutch 
economy is also an open one, with exports of goods and services accounting for 
85% of GDP in 2012. Competitiveness of the Dutch economy is supported by a 
highly productive workforce and well-developed physical infrastructure. Driven 
by healthy trade surpluses, we expect the Dutch current account surplus to 
average just under 9% of GDP between 2012-2015. Strong current account 
surpluses have led to the accumulation of significant external assets in the 
private sector (in particular, in the form of assets of pension funds and 
insurance companies). We estimate that The Netherlands' net internal 
investment position will reach a positive 40% of GDP in 2012. We expect 
general government net debt to continue to rise gradually to reach 66% of GDP, 
from 62% in 2012, as fiscal deficits remain close to 3% and economic growth 
remains sluggish at an average of less than 1% per year in 2013-2015, in our 
view. 

As a result of the general elections on Sept. 12, 2012, the centre-right VVD 
party of Prime Minister Mark Rutte emerged as the strongest party, closely 
followed by the Labor Party. On November 5, the two parties formed a majority 
coalition. The government's multiyear fiscal package is targeting budget 
savings of EUR16 billion (2.6% of GDP) by 2017, mainly by reducing healthcare 
spending, which should lower the fiscal deficit to 3% of GDP in 2013 from 3.7% 
in 2012. 

We believe the risks of fiscal slippage could rise substantially should this 
year's economic growth fall significantly below our current assumption of 
0.3%. Despite significant pension and insurance savings, in gross terms Dutch 
households are highly indebted, which in our view makes them vulnerable to 
valuation and liquidity risk. The continuing decline in house prices and the 
uncertain external environment are pushing up precautionary savings, hence 
weighing on domestic consumer demand. As in much of the European Economic and 
Monetary Union (EMU or eurozone), net exports continue to be the sole positive 
contributor to GDP performance. In our view, the final fiscal outcome will be 
contingent on overall growth in the highly open Dutch economy, which is highly 
exposed to its eurozone partners via trade and financial channels and is 
therefore vulnerable to potentially sizable exogenous shocks (see "The 
Eurozone Enters An Uncertain 2013 As The New Recession Drags On," published on 
Dec. 13, 2012). Furthermore, in our opinion the political response to fiscal 
slippages may be complicated by a significant decline in government popularity 
among the population since the elections, as suggested by recent opinion 
polls. 

We estimate external debt, net of liquid external assets (narrow net external 
debt), at 150% of current account receipts (CARs) in 2012, which primarily 
reflects the relatively high level of external leverage in the banking sector. 
The amount of bank debt maturing over the next year remains large, with about 
50% of total banking system external debt classified as short term. At the 
same time, however, the Dutch central bank's Target 2 surplus with the 
European Central Bank, while down from its peak in summer 2012, remains high 
at EUR119 billion (19% of GDP) at end-November 2012, suggesting domestic banks 
have repatriated funds to bolster their liquidity. Compared with most of their 
eurozone peers, we consider that Dutch banks appear to have maintained better 
access to external funding during the crisis. That said, we see increasing 
domestic risks for the banking sector, as reflected in our revision of the 
Banking Industry Country Risk Assessment (BICRA) for The Netherlands on Nov. 
16, 2012, to group '3' from group '2' (see "Banking Industry Country Risk 
Assessment: The Netherlands"). We expect ongoing pressure on the private 
sector as a result of the continued price correction in the Dutch property 
market, dampening consumer confidence, the recessionary conditions in the 
eurozone, and measures to reduce the budget deficit. However, the overall 
impact should, in our view, be relatively limited. 
Outlook
The negative outlook reflects our view that there could be a more negative 
macroeconomic scenario, connected to possible pressures on the Dutch financial 
sector and the broader Dutch economy caused by the potential for a sharper 
than currently projected decline in domestic demand and a weakening external 
environment.

We could lower the ratings if we see that public finances deviate 
significantly from the consolidation path over 2013-2015. This could occur if 
there is a prolonged and more severe decline in economic activity than we 
currently envisage, or if political commitment to a gradual stabilization of 
public debt levels were to weaken. A need for the government to provide 
material capital support to banks or any other crystallization of contingent 
liabilities exceeding 10% of GDP could place pressure on the ratings.

Alternatively, if we see a significant worsening of Dutch banks' external 
position or difficulties in their refinancing maturing debt, we could lower 
The Netherlands' external score, which might also lead to lowered ratings. 

Conversely, the ratings could stabilize at this level if we see that sustained 
external pressures within the eurozone and the domestic housing price 
correction do not significantly depress growth and fiscal performance in The 
Netherlands, enabling it to continue to consolidate public finances and 
preserve its traditionally strong external position. 
Related Criteria And Research
     -- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
     -- Criteria For Determining Transfer And Convertibility Assessments, May 
19, 2009
     -- Economic Research: Economic Outlook For The Netherlands: The Housing 
Market Slump Is Dampening Consumer Demand, May 21, 2012
     -- No Pain, No Gain: How The Housing Market Correction Is Affecting Dutch 
Banks, June 27, 2012
     -- Banking Industry Country Risk Assessment: Netherlands, Nov, 16, 2012
     -- The Eurozone Enters An Uncertain 2013 As The New Recession Drags On, 
Dec. 13, 2012
     -- The Eurozone Debt Crisis: 2013 Could Be A Watershed Year, Jan. 10, 2013

Ratings List
Ratings Affirmed

Netherlands (The) (State of) (Unsolicited Ratings)
 Sovereign Credit Rating                AAA/Negative/A-1+  
 Transfer & Convertibility Assessment
  Local Currency                        AAA                

Netherlands (The) (State of) (Unsolicited Ratings)
 Senior Unsecured                       AAA                
 Short-Term Debt                        A-1+               

Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V.
 Commercial Paper*                      A-1+               
*Guaranteed by Netherlands (The) (State of) (Unsolicited Ratings).
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